21 - 27 March 2002
Issue No.578
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Al-Ahram Weekly Online 21 - 27 March 2002 Issue No.578 |
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A stitch in time
Mahmoud Mohieldin argues that the economic reform programme adopted by the government during the 1990s needs to be followed through
As a result of the comprehensive economic reform programme launched in 1990/91, the Egyptian economy enjoyed positive trends in its performance until its exposure to three major consecutive shocks within a period of six months starting in mid-1997. The shocks were the financial crises that erupted in Asia in 1997 and spread to other emerging economies; the Luxor attacks which had a negative impact on tourism and foreign investment; and finally the sudden collapse in oil prices. It is customary for a small "open" economy to be exposed and affected by external shocks, but ultimately it is the macro-management of such an economy that is of the essence in dealing with these shocks in order to minimise their negative impact.
Economic management at the time had apparently confused economic measures with ultimate targets of policy, and thus created "sacred" values for some economic indicators. These highly revered indicators included a fiscal deficit to GDP that should not exceed 1 per cent, international reserves that should not fall below $20 billion, and a nominal value of the dollar against the pound that should not be allowed to go beyond 3.4. Monetary and fiscal policies were managed in a manner that attempted to achieve these "targets," and -- through the influence of the media -- it became a concern of the public as well as some economic agents to maintain them.
The global economic fallout from 11 September exacerbated already perceptible trends of slowed economic growth, thus increasing internal and external imbalances the Egyptian economy was already experiencing. Egypt's main sources of foreign currency earnings suffered; tourism receipts declined significantly; the transport sector was especially hit and revenues from the Suez Canal dropped considerably.
Uncertainty encouraged expatriates to keep their money abroad, in addition to the exchange rate risk in view of anticipated further devaluations of the Egyptian pound. Foreign direct investment has also fallen considerably, mainly as a result of the slowdown in the privatisation programme and the tough competition between developing countries to attract foreign investment.
The Egyptian government, in response to these pressures, adopted a more flexible exchange rate. The Egyptian pound depreciated by almost 35 per cent between March 2000 and January 2002. Measures were taken in the year 2000 to address the fiscal implications of the external shocks and deal with the problem of the arrears in payments by government to both the private and public sector, which had mounted to more than LE 18 billion. The Central Bank, in an attempt to give a signal of expansionary policy to the market, reduced the discount rate and then reduced the reserve requirements by 1 percentage point in 2001.
But bearing in mind that coping successfully with economic problems depends on the willingness to face them without delay and taking hard decisions at the right time, the question is why the authorities took these measures with delays that ranged from two to three years?
There are many "positive" and "normative" answers to this question. Let us, in an attempt to answer it, focus on the economic decision-making process, which normally takes five steps. The first step in the process is information and data gathering, which takes a few months to make the necessary raw data available to analysts. The second step is data analysis, a process that takes another few months. The third step is providing alternative scenarios of policy action to the policy-maker to choose from, and which may take again some time. The fourth step is the discussions among the policy-makers and their evaluation of the "adequate" decision. The fifth step is the feedback process from the market and its economic agents in response to the decision. All of these steps take time even in an advanced economy, but they definitely take even more time in a developing country like Egypt because of the inefficiency in the civil service institutions. Beyond the issue of delays, the government, in an effort to "balance" its decisions, falls into many political compromises that result in taking "soft" decisions.
Despite the indications of increased vulnerability and riskier environment, the fundamentals appear strong. The inflation rate is still low and the labour force is active and trainable. On the external front, the maturity structure of external debt is favourable (only 6 per cent of external debt is of short-term maturity). The EU partnership agreement has been signed and the international donor community has shown clear support. The Sharm El-Sheikh Consultative Group meetings held in February are expected to generate immediate financial assistance amounting to more than $10 billion in grants and concessional loans during the coming three years, of which around $3 billion are quick disbursing commitments. This should help in fostering economic growth and in confronting the existing external environment difficulties.
Nevertheless, several measures need to be pursued to restore confidence in the economy: a consolidated fiscal policy, a credible monetary policy, a transparent foreign exchange regime as well as aggressive structural and institutional reforms. The fiscal position should be kept under close scrutiny, with a high priority given to expenditure management.
Transferring control of the National Investment Bank to the Ministry of Finance represents an important step in strengthening the government's capacity to manage the investment budget. Monetary and exchange rate policies need to be more coordinated and responsive to developments. There is also a need to accelerate structural reforms.
These suggestions are not new. The reader will find them in almost all the local and international reports which address the Egyptian economy. But are they enough to meet the challenges of globalisation? Are they sufficient to generate jobs for 800,000 young Egyptians every year?
I consider the afore-mentioned measures and suggestions as necessary, but not sufficient for a serious and effective economic reform programme for the future. They might be relevant and adequate to the environment of the 1990s but not for today. We need more than this. We need to tackle what was dropped from the reform agenda of the 1990s. We may have liberalised parts and segments of the economy through trade and financial reforms and privatisation but we failed to liberalise the minds of those who are responsible for managing the reform in the civil service, public administration and some of the regulatory agencies. Enhancing the efficiency of the Egyptian civil service and regulatory agencies, endowing them with qualified human resources and reviving the golden rules of hire-and-fire are part of our first challenge.
Second, we may have facilitated entry into our markets but we have to establish fair and efficient exit rules, through the implementation of the bankruptcy provisions in our commercial code and the activation of the functions of mergers and acquisitions in the corporate sector. We have to make our market more competitive, efficient and effectively regulated, through fair implementation of competition policy and consumer protection provisions. We have to make our markets more contestable by the elimination of what remains of artificial barriers to entry and exit.
Third, we have to take globalisation more seriously. Those who even remotely follow our press have found intense debate praising or condemning economic globalisation. Meanwhile, by every standard of economic integration, one finds a decline. Trade as a percentage of GDP fell from 52 per cent in 1985 to 40.4 per cent in 1999; foreign direct investment as a percentage of GDP declined from 3.4 per cent in 1985 to 1.2 per cent in 1999; and workers remittances as a rough proxy for labour movement declined from 10.1 per cent of GDP in 1985 to 4.2 per cent in 1999. Naturally, Egypt cannot be included in the post-1980 globalisers. Further measures are required for positive integration in the world economy through boosting exports of goods and services and attracting capital flows.
Indeed, if the government manages to implement the "traditional" package of reform and take seriously the "new" suggested measures into economic policy formulation, the Egyptian economy will be well positioned to take its deserved position in the global economy with its wealth of resources, unique geographic location and huge potentials.
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